I began writing about the incipient economic meltdown around the beginning of this year. We now appear to be drawing close to the climax of this drama.

Beginning with Bear Stearns, the Federal Reserve engineered a series of precedent-breaking bailouts of private financial institutions. With Fannie Mae and Freddie Mac, they actually took over private corporations. The AIG bailout gives the government a 79% stake in a private corporation. These were just the warm-up acts; nothing has been done to correct the underlying problem.

Now we hear of Bernanke, Paulson, and congressional leaders huddling, speaking in grim tones about the pending meltdown. As the outline of the proposed solution dribbles out, reaction ranges from optimism to alarm.

It is important that everyone understand the true nature of the problem.

Bernanke, Paulson & Co. are not telling the American people the truth about the financial crisis; neither are the major media reports. We are told that the crisis stems from subprime lending gone sour; this is false and misleading.

The liquidity crisis and subsequent panic in the markets have been primarily caused by criminal fraud. Those perpetrating the fraud include the top movers and shakers in our economic and political system. The tentacles of this scam reach into the highest political offices.

The housing bubble did not cause the crisis, but was used as a vehicle and smokescreen for fraudulent activity. Do the simple math: what percentage of mortages are currently in default? The numbers for August indicate that 2.8% of all outstanding mortgages nationwide are currently in default.

Ask yourself: How could the balance sheets of formerly profitable enterprises, such as Lehman Brothers, switch from billions in the black to billions in the red in a matter of months?

To the extent that a portfolio has exposure to mortgage-backed securities, a 2.8% default rate should translate into some decline in value, but nothing like the avalanche of pending failures and bankruptcies among supposedly venerable banks, brokerage firms, and financial services corporations. There is obviously a major component of the story that we are not being told.

Derivitives: The Black Hole of the Financial World

Current estimates of worldwide derivitive instruments range from 500 trillion to 1.5 quadrillion – this is more than the annual gross economic output of the entire world. I have been trying to research how derivitives are created and how they actually work, but the subject is complex and mysterious.

Apparently, derivitives are not exactly legal, and are not sanctioned by any government, but have managed to become a huge factor in investment portfolios. It’s as if an unregulated process has been allowed to create a vast expansion in the money supply, except that the money doesn’t actually exist. Yet, because they are valued in dollars, the expectation exists that someone owes someone else X amount of dollars. Until recently, these financial devices were traded as if they had inherent value. As the realization dawns that they may be worthless, a toxic black hole is appearing on balance sheets and portfolio values everywhere, thus contributing to the present panic.

Without question, fraud and shady practices must play a huge factor in the derivities market, but we just don’t know the details yet. The numbers involved are truly staggering.

Mortgage Fraud – One topic you won’t hear Hank Paulson mention

One source of illumination is Catherine Austin Fitts, who served under Bush 41 as an assisant secretary of HUD. She uncovered large amounts of criminal activity in the mortgage market, much of it involving collusion at the highest levels of government. And this was before the housing bubble really got started.

Now she asserts that massive fraud is behind the current wave of financial meltdown. Apparently, the same mortage would be used several times to create many of the CDOs (collateralized debt obligations) that are causing balance sheets to implode. Thus, the assets for backing the securities never existed, yet many were given AAA rating. Even if the foreclosure rate were zero, we would still have a massive problem.

Hank Paulson’s Fix: Use your tax money to bail out his investment banker buddies

The proposal being floated would have congress authorize the Treasury Secretary to spend $700B to purchase toxic debt from banks and other institutions. He solemnly warns that “this would cost taxpayers less than the alternative”. So, either bend over now or bend over later...

Paulson was formerly with Goldman Sachs, which would persumably be a large beneficiary of the bailout. He undoubtly knows a great deal about the criminal fraud that has been perpetrated, and perhaps participtated in it himself. Thus, we are never going to get the straight scoop from this guy, or any of his cronies.

The proposed legislation would, in effect, declare economic marshal law. It assigns all decsion making to the Secreatry of Treasury, and declares that neither congress, the courts, or any agency shall be able to question his policies.

Once again, fear is being used as a tool to ensure compliance for anything the government chooses to do. Look for congress to meekly pass whatever is proposed, and then a huge (temporary) sigh of relief will ensue.

Another strange element is the power vacuum in which Paulson and Bernanke are operating. Neither McCain nor Obama (Where is Bush?) are willing to display any leadership on this matter. Both candidates have stated that they will propose their positions after the Fix has been decided upon by the Powers That Be. This is a watershed event that may affect the nation's future for decades to come, and yet our would-be leaders display no leadership. Seems like a blatant admission that the electoral process is irrelevent, and that real decisions are made by others behind the scenes.

Of Course, What is Needed…

…Is an independent, honest inquiry into the financial practices that led to the crisis. The criminal activity should be exposed, and the quilty brought to justice. Of cource, since some of the players are major names in government and industry, this will never happen. PIGS WILL FLY BEFORE THIS HAPPENS.

Instead of expanding the national debt by billions (say trillions) to bail out the greedy bastards, the aid should be directed toward struggling homeowners, toward rebuilding crumbling infrastructre, and revitalizing our industrial base.

As an absolute minimum, foreclosures should be banned for an extended period, and mortgages should be required by law to be written down to current real estate values. The average citizen should not be penalized for criminal activity on high.

Most likely, the financial system is going to collapse regardless of what is done. Every bailout effort only delays the inevitable. It is time to begin looking ahead to what can be rebuilt from the rubble.

Let’s hold the bastards accountable, but then let’s move on and build a better system.

-Darkwave